The Texas Department of Banking closed The Enloe State Bank on Friday according to an FDIC press release. The FDIC then arranged for Legend Bank, N.A. to assume the insured deposits. This is the first bank to fail since December 2017. The Enloe State Bank was small with only one branch, $36.7 million in assets and $31.3 million in deposits.
Between 2009 and 2017, it has been typical for the FDIC to arrange for another bank to acquire the failed bank and to assume all deposits, even those above the insurance limits. The FDIC did find another bank to acquire The Enloe State Bank, but the acquirer only agreed to assume insured deposits. This means that depositors who had over the insurance limits may lose those uninsured deposits. According to the FDIC, “there were approximately $500,000 that exceeded FDIC insurance limits.”
Here are the instructions for depositors that the FDIC stated in its FAQs for this failure:
YOUR INSURED DEPOSITS ARE SAFE! No one lost any insured money on deposit as a result of the closure of this bank. The insured balance in your deposit account(s) was transferred to Legend Bank, N.A.
If you had more than $250,000 in your account(s), or if the total of your related accounts exceeds $250,000, your accounts may require review by an FDIC Claims Agent. Please contact the FDIC Call Center at 888-408-4360 to schedule an appointment with an FDIC Claims Agent.
It appears the FDIC Claims Agent will decide if amounts over $250,000 qualify for coverage based on ownership categories. As most DA readers know, there are many ways to exceed $250,000 in FDIC insurance coverage. However, the responsibility falls on the depositor to make sure he or she qualifies for the additional coverage. Many factors can cause deposits over the $250,000 to not be insured. For example, Revocable Trust Accounts qualify for coverage of $250,000 per owner per unique beneficiary. However, if the beneficiary is deceased, the additional $250,000 of coverage is no longer available.
Customers with insured deposits don’t have to worry about loss of of their money, but they will have to worry about the reduction of interest rates on their CDs. Here’s what the FDIC describes in its FAQs:
Interest on deposits accrued through close of business on May 31, 2019, will be paid at your same rate, up to the insured amount. The Enloe State Bank’s rates will be reviewed by Legend Bank, N.A. and may be lowered; however, you will be notified in writing of any changes. You may withdraw funds from any transferred account that is not on hold, regardless of whether your interest rate changes, without an early withdrawal penalty until you enter into a new deposit agreement with Legend Bank, N.A.
Cause of the Failure
The Texas Department of Banking issued this press release which claims that fraud did cause the closure of The Enloe State Bank. Here’s the excerpt that mentions fraud:
Located 88 miles northeast of Dallas, Texas, The Enloe State Bank had deposits totaling approximately $31.3 million as of March 31, 2019. Commissioner Cooper stated, “This is the first Texas state-chartered bank to be closed since 2011. It is unfortunate that we are forced to close this bank which was chartered in 1928 due to insider abuse and fraud by former officers.”
It may take several months before we learn the details of the fraud and abuse. It took 11 months before the government provided the fraud details of the December 2017 bank closure. That fraud was allegedly perpetrated by the bank president and other employees of the small Chicago bank, Washington Federal Bank for Savings. The closure of Washington Federal had similarities with The Enloe State Bank closure. For both cases, the acquiring bank only agreed to assume the failed bank’s insured deposits and to purchase only a small percentage of the failed bank’s assets. There were several suspicious events that took place before the Washington Federal closure that pointed to fraud. Evidence of fraud was described in a Material Loss Review that was published by the Treasury Department on November 2018. The Review opened with this summary regarding the cause of the failure:
In brief, we found Washington Federal failed because of fraud in the bank’s loan activity perpetrated by bank employees. The fraudulent activity depleted the bank's capital, with the result that the bank was insolvent and was in an extremely unsafe or unsound condition to transact business.
Even without the Texas Department of Banking press release, there are signs pointing to fraud at The Enloe State Bank. For example, the Northeast Texas newspaper, The Paris News, reported that the fire department was called to the bank on May 11 (a Saturday), and “they found papers on a table in the conference room on fire.”
Fraud explains why the bank appeared financially healthy when looking only at the financial numbers. Bankrate gave the bank 5 stars, its highest safe and sound rating. We did a little better by only giving the bank a “B+” health grade. Factors including its small asset size prevented the bank from receiving higher grades of an “A+” or an “A”. Obviously, the financial numbers didn’t capture a serious problem with the bank that caused the regulators to shut it down. Our health grades at DepositAccounts are based on financial data from quarterly call reports that are provided by the FDIC.
This bank failure is an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.
Credit Union Liquidations and Conservatorships
Since the previous bank failure in December 2017, eight credit unions have been liquidated (seven in 2018 and one in 2019.) The most famous of these was Melrose Credit Union; it was liquidated last August. The Melrose liquidation was the result of Melrose’s high concentration of Taxi medallion loans, and the troubles of the New York City taxi industry as it tried to compete with the rise of ride-sharing app-based services like Uber. Another NYC credit union that had this problem was LOMTO. This credit union was liquidated a month after Melrose fell. Melrose was a large credit union with $1.1 billion of assets before it closed. LOMTO was also sizable with $156 million of assets. The other six credit unions that were liquidated were smaller, including two that were very small with assets under $1 million.
Besides being liquidated, a troubled credit union can be placed into conservatorship in which the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.
Large NYC Credit Union Hurt by CEO Fraud
A total of four credit unions have been placed into conservatorship and remain in conservatorship since December 2017 (two in 2018 and two in 2019.) The most noteworthy of these four credit unions is Municipal Credit Union (MCU) which was placed into conservatorship last May. MCU is a large New York City credit union which currently has $2.86 billion in assets.
Like the case of The Enloe State Bank, MCU’s troubles appear to have been the result of fraud. This week, the former CEO of MCU, Kam Wong, was “sentenced to 5½ years in prison for defrauding the non-profit financial institution of almost $10 million dollars” according to NYC newspaper, The Chief.